Philip Morris International (PM)

• Article
• Discussion
• Edit
• History
• Bookmark

See all Bulls Reasons Bulls: Reasons To Buy Investment funds lifting tobacco ban? 100% agree Investment funds lifting tobacco ban? California State Teacher’s Retirement System is turning around a long standing ruling that prohibited them from investing in those sinfully smoky tobacco stocks. In theory, the eight year old ban was put on because of the worries about the pending lawsuits... read more View or Edit Reason 1 votes 100% agree Bears: Reasons To Sell Feeling Bearish? Be the first to explain why this would make a poor investment Send the authors a comment or suggestion my name is james hill i designed philip morris packerging for 7 years and i would like to now som... more [Dismiss] [Done] i hope phillip morris expand its market to east africa-signed-curtis kabiro of livermore californ... more [Dismiss] [Done] See All Suggestions

Top Contributors Kai Ross Related Articles Altria Group (MO) Cigarettes Advertising British American Tobacco Industries (BTI) China's Piracy & Counterfeiting Problems Related Blog Posts » See All Related Posts powered by Wikinvest Wire

While international sales continue to grow for Phillip Morris, domestic sales revenues have been in decline as Altria struggles to cope with higher state tobacco tariffs and the tobacco industry's negative image in the United States. The newly independent Philip Morris International will sell tobacco products in international markets while Altria will maintain its own domestic operations. In addition to selling Marlboro branded cigarettes, the world’s highest volume cigarette brand (92 billion units in CY 2007), PMI also has seven of the top ten brands by volume global such as L&M, Philip Morris, Bond Street, Chesterfield, Parliament, Lark, A Mild, and Morven Gold throughout Europe, South America, and Asia.^[2]

[edit] Company Overview

Quarterly Growth of Select PMI Brand and Total Shipment^[3]

Philip Morris International's tobacco products include traditional cigars and cigarettes as well as smokeless products such as snuff and chewing tobacco. Although Philip Morris International is headquarted in New York, NY, all of its operations are conducted internationally though its operation center located in Lausanne, Switzerland. ^[4]

Prior to its spinoff from Altria on March 31st, 2008, as the international segment for Altria, PMI has historically generated the highest proportionate sales revenue and operating income out of all of the segments in Altria’s portfolio. From 2002 to 2007, Altria’s domestic tobacco segment has contributed around $17 to $18 billion in sales revenue with no clear direction in growth, while Altria’s international segment has grown from contributing $28 billion in sales revenue for 2002 to more than $55 billion for 2007. Also, in 2007, Altria’s domestic segment contributed $4.5 billion to operating income whereas Altria’s international segment contributed $8.9 billion to operating income. ^[5]

The main logic behind the spinoff of PMI from Altria Group was to allow shareholders to profit more directly from tobacco revenue. As a result of the spinoff, every shareholder of Altria received, for every share of Altria held, a share in the new independently traded and unaffiliated Philip Morris International. Another factor in the companies' separation is discrepancy in demand for international vs. domestic tobacco sales.

Altria's Domestic and International Tobacco Revenue's by Segment from FY2002 to FY2007

Source: Consolidation of Operating Income from Altria's FY 2007 Annual Report

[edit] Cigarette Brands

In addition to providing service to about 15.4% of the global tobacco market, PMI also owns seven out ten of the top selling international cigarette brands. PMI comes into contact with two distinct customers when marketing its cigarettes – the value consumer and the discriminatory consumer. Value consumers are more concerned with the price of the tobacco products, whereas discriminatory consumers are concerned with where the tobacco was grown and the quality of the product they are purchasing. PMI, for the most part produces tobacco for the discriminatory consumer, but does maintain a portfolio of three value company brands (Bond Street, Red and White, and Next branded tobacco products) that operate globally. To meet the needs of its discriminatory customers, in addition to owning globally recognized branded cigarettes such as Marlboro, L&M, Philip Morris, and Chesterfield, PMI owns local brands such as A Mild and Diji Sam in Indonesia, Diana in Italy, and Assos in Greece to take advantage of established brands as opposed to marketing new brands in some regions.^[6]

[edit] Trends and Forces

[edit] The Altria - PMI Split

As you can see from the chart expressing the company formerly known as Altria’s domestic and international tobacco sales revenue from FY2002 to FY2008, domestic tobacco revenue has been stagnant over the past five years for the company formerly known as Altria Group (MO). Recently, tobacco companies operating from within the United States market have faced significant challenges. As a result, Altria saw value in a split the between its domestic and international segments. Under a single company model, when either the domestic or international segment has a downturn in sales revenue, the other segment would be under pressure to increase sales and decrease expense to offset this weakness on the other side of the business. the company revenue and expense on the balance sheet. This was the case prior to the spin off, and Altria itself inherited both the domestic and international risk. From the shareholder’s perspective, separated segments allows investors to allocate their capital according to which market they see as the most lucrative based on that market’s risk profile.

[edit] Litigation Risks

While international tobacco growth in both emerging and developed markets flourished over the past five years, the domestic tobacco market has been under severe pressure. On one hand, both private and public litigation against tobacco corporations in the United States from the early 1990s has hindered Altria’s possibilities for growth. As of December 31, 2007, there were at least 135 pending lawsuits against Altria's domestic segment, originated by individuals and federal entities. In addition, Altria has paid more than $74 billion in damages to settle past lawsuits.^[7] As media and public interest groups have increased their lobbying efforts against big tobacco, states have increased their tax rates (New York State has recently increased its tax on cigarettes from $1.50 to $2.75) on cigarette products.^[8]

In nearly all of the countries in which PMI operations, PMI’s products are subject to various local excise taxes. Not only do these taxes add costs to PMI's operations, but if PMI passes on the taxes to the consumer by raising prices, PMI’s higher end products become harder to sell. In some cases, higher prices because of taxes also result in new, low-cost competitors, including counterfeit products at a lower price to the consumer. In all cases, when taxation of tobacco related-products increases, PMI’s revenue suffers.

[edit] Tar and Nicotine Testing Methods

A number of world public health organizations have brought to the attention of tobacco corporations an issue with the “ISO” method of testing (an industry tar and nicotine testing standard). Specifically, the impact of tar and nicotine levels in tobacco products,as determined by the ISO method, provides inaccurate guidance as to the actual effect on the human body. Since the ISO method does not provide a comprehensive analysis of different inhalation methods of smoking, the results of the ISO method are not a reflection of the true population of smokers. A developing method for testing known as the Health Canada calls for Altria to change over to this newer, more expensive form of testing to satisfy the standards set by public world health organizations. Switching to new testing methods would cause Philip Morris to incur significant expenses in purchasing equipment and performing the new tests.

[edit] Ingredient Disclosure Laws

In a large number of international marketplaces, PMI is required by local law and regulation to disclose the ingredients and related toxicological characteristics that are in its tobacco related products, for consumer health reasons. From a tobacco company’s perspective, some of the standards of disclosure impact sales in two ways. The first is, along with a greater transparency in information, people be more health conscious when deciding whether to buy tobacco products, reducing the volume of sales. Additionally, some companies including PMI argue that full disclosure of ingredients to the consumer aids counterfeiting, and that full disclosure of tobacco products gives away “trade secrets” and ultimately the competitive edge of the tobacco company.

[edit] Bans and Restrictions on Marketing and Advertisement

With respect to brand advertisement and marketing, many countries impose partial or total restrictions not only on the way in which they advertise, but also the groups they advertise to and the physical size of advertisements. In some case, countries even view the packaging and form of tobacco products itself as an advertisement or marketing tactic, requiring all tobacco products to be marketed using generic packaging and standard forms. Seeing as the way in which advertisment and marketing is conducted greatly infulences the amount of customers that are aware of and are attracted to buy tobacco products, these restrictions directly influence PMI’s ability to earn sales revenue.

[edit] Competition and Market Share

Int'l Tobacco Market, by volume, Source: World Health Organization (1999)" ^[9]

Philip Morris International, as of May 1st, 2008, holds a 15.4% share of the global tobacco market excluding the United States. Its main competitors are British American Tobacco (15.4% market share), and Japan Tobacco International (7.2% market share). Despite the fact that these are the three largest companies in terms of revenues and number of cigarettes sold internationally, they only account for 38% of the global market. One reason for this is the large number of small, domestic tobacco companies, which can retain a sizable share of their local markets without accounting for a statistically significant percentage of the overall global market. Secondly, the political climates in some countries prohibit the free entry of international companies. One example is China, where the over 1.7 trillion cigarettes smoked annually are manufactured and sold almost exclusively by the state-owned China National Tobacco Co.. The Chinese market accounts for nearly 30% of global cigarette consumption, making China National Tobacco the largest tobacco company in the world. However, it's not generally included in the data on international tobacco companies since it's considered a state monopoly.

Sources: Credit Suisse, Fortune Global 500, Japan Tobacco

[edit] References

1. ↑ PMI 1Q2008 Earnings Release
2. ↑ PMI Corporate Website, “Our Brands”
3. ↑ Philip Morris International Q1 and Q2 2008 8-Q Quarterly SEC Filing, "Consolidated Operating Results," page 38 and 46
4. ↑ PMI Corporate Website, “About Us”
5. ↑ Altria FY2007 Annual Report, “Financial Highlights,” page 3.
6. ↑ PMI Coroprate Website, “Our Brands”
7. ↑ Atria Corporation FY2007 Annual Report, “Note 19,” page 79.
8. ↑ Fleenor, Patrick. Wall Street Journal “New York Tax Increases Fuel Organized Crime,” section A page 17.
9. ↑ The World Health Organization, "The Tobacco Atlas," Section: The Big Five, page 50.